Investors have grown accustomed to technology, data and software companies shooting the lights out. The inherent risk of this artificial intelligence (AI) euphoria, however, is that some tech stocks just can’t keep up with investors’ insatiable demand for exponential growth.
As a case in point, Sage gained 60.9% last year but has sputtered recently, losing 13% in the second quarter of 2024. The enterprise software company’s share price is down 8.8% year-to-date, as of 15 July.
Sage’s share price performance vs FTSE All Share over 2yrs
Source: FE Analytics
Nick Train, manager of the Finsbury Growth & Income Trust, has experienced both sides of the coin recently. His holdings in Experian and RELX each rose 8% in the second quarter of this year, hitting all-time highs. But at the same time, London Stock Exchange Group (LSEG) was flat while Sage slid.
“For all these technology-type investments to work, their revenues must grow ahead of investor expectations,” Train observed.
“Given its flat share price, LSEG has something to prove to investors,” he continued. “Imminent updates about the efficacy and popularity of its new suite of products and services, developed with its joint venture partner Microsoft, need to be encouraging.”
At its May interim results, Sage issued guidance that revenue growth would be about 9% for the rest of this year. Even though this forecast fell short of “more optimistic hopes”, it is a much faster growth rate than Sage delivered over the past five to 10 years, Train pointed out.
“If the revenue growth rate stays around 10%, as management is guiding, we’d expect the shares to make new highs soon enough. There is no doubt Sage has a big growth opportunity, especially in the US.”
Trust’s total returns vs sector and benchmark over 3yrs
Source: FE Analytics
The Finsbury Growth & Income Trust’s second-quarter performance was dragged down by its consumer brand names, with Burberry and Diageo both undergoing double-digit share price declines. “The greater the exposure to luxury or premium brands, the worse the performance of the shares,” the manager said.
Lindsell Train is engaging the Burberry’s new chief executive, Joshua Schulman and his team about how to fulfil the brand’s potential.
Elsewhere, the trust has been a beneficiary of Hargreaves Lansdown’s more than 50% rise after a bid from a private equity consortium.
Train expects other companies within his portfolio, whose share prices do not reflect their strategic value, to attract bids. He thinks Carlsberg’s pursuit of Britvic (which FGIT does not own) bodes well for soft drinks companies AG Barr and Fever-Tree, which the trust holds.